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Half Full: Q3 2020 Market Commentary

By: Mark Paccione, CFA, CFP®, BFA™
4 Minute Read

“Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves.” – Peter Lynch (well-known American investor)

Every year, we seem to say, “this is the most difficult investment environment yet.” And, 2020 is no exception. There’s a long list of risks that investors have to contend with, including:

  1. Civil unrest
  2. High unemployment
  3. Increasing COVID-19 cases in the U.S. and abroad
  4. Upcoming elections with the possibility of disputed results
  5. Elevated technology stock valuations

Yet, markets continue to climb the proverbial wall of worry. The S&P 500 Index was up 8.9% in the third quarter and is now up 5.6% for the year through September 30—driven in large part by the technology sector, which is up 28.7% YTD as measured by the S&P 500 Info Tech Index.

The market does have several tailwinds that we believe should outweigh the aforementioned risks over the long-term—specifically: low interest rates with the Fed on hold until 2023 at least, a robust residential real estate market, and the onshoring of manufacturing companies.

Low Interest Rates

The Fed recently announced that they have no plans to raise rates until at least 2023.[I] While some may worry about the long-term implications of zero percent interest rates, including this author, it should encourage more borrowing by individuals and corporations which, in turn, should help stimulate the economy and support asset prices.

In addition, and as we discussed in our second quarter market commentary, the S&P 500 has been highly correlated with Central Banks’ balance sheets since the Great Financial Crisis.

We believe this correlation will continue in the future and will be a significant tailwind for global equity markets until Central Bank balance sheets begin to shrink—something we do not anticipate anytime soon.[II]

A Robust Residential Real Estate Market

Residential real estate is one area that benefits from both low interest rates and the current work-from-home environment, both of which should continue for some time. As we saw pre-2008, a robust residential real estate market does have a multiplier effect as it benefits many different sectors from materials (timber), to retailers (home furnishing and home improvement), to transportation (movers), to services (agents and appraisers), and financials (banks and mortgage brokers).

We believe residential real estate will be a driver of economic activity for some time—given the increasing demand and limited supply indicated by the chart below, which shows the amount of existing homes for sale is at the lowest level in decades and the lowest since they began tracking the data in January 1999.

Source: Bloomberg

The Onshoring of Manufacturing Companies

Finally, many companies have begun to relocate manufacturing and operations back to the U.S., partially due to ongoing trade tensions with China and weaknesses in the supply chain exposed by the current pandemic.  Research outfit Cornerstone Macro counts 176 companies that have already moved production back to the U.S. or have announced plans to do so.[III]

We believe this will help the job market recover and lead to increased productivity that should help long-term economic growth.

In Summary

The market risks and tailwinds laid out have a number of portfolio implications that investors should consider.

First, upcoming elections, with the possibility of disputed results, could lead to heightened volatility through the end of the year.  Investors who need to withdraw funds from investments over the next several months should consider raising those funds now.

Second, those sitting on the sidelines with cash to invest should consider investing that cash in tranches (aka dollar cost average) to minimze fears of buying at the wrong time. We do not suggest waiting until after the election for reasons we discussed in our September 2020 commentary. While parts of the stock market are expensive and the election may result in volatility, we are long-term investors at Curi Capital, and we believe what matters is time in the market not timing the market.

Third, now is a great time to rebalance. If you have a diversified portfolio with different asset classes, it’s very likely that you are overweight large cap U.S. stocks versus other asset classes.  Now is a great time to trim large caps to fund purchases in other asset classes like international stocks, bonds, and small cap stocks. Curi Capital is doing all three actions for many clients who have the confidence to give us discretionary authority to proactively enact changes in their portfolio.

If you are interested in reviewing your portfolio, discussing potential actions, or exploring what Curi Capital can do for you, please reach out to a member of the Curi Capital team at 984-202-2800.

Curious? Contact us to learn how we can help

Please note: This material should not be considered a recommendation to buy or sell securities or a guarantee of future results. Curi Capital is a registered investment advisor. Registration does not imply a certain level of skill or training. More information about Curi Capital can be found in its Form ADV Part 2, which is available upon request.

Past performance is not a guarantee of future results. All investment strategies have the potential for profit or loss; changes in investment strategies, contributions, or withdrawals may materially alter the performance and results of a portfolio. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will be suitable or profitable for a client’s investment portfolio.

[I] “Fed Signals Interest Rates to Stay Near Zero Through 2023” (Wall Street Journal)

[II] Lazar, Nancy. Cornerstone Macro. 29 September 20. “Onshoring Companies Flocking to Middle America.”

[III] The Macro Teller. 6 January 20. “The Fed Is Your Best Friend And The Proof Is In The Balance Sheet Pudding” (Seeking Alpha)

Mark Paccione, CFA, CFP®, BFA™

Mark Paccione is Curi Wealth Management, LLC’s, Chief Investment Officer, based in Raleigh, NC.

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